Bermuda provides clarifying details regarding its proposed corporate income tax

In detail

The third PCP provides details with respect to the scope of the proposed CIT, including the computation of taxable income and the tax itself. Many of the proposed rules were announced in the second PCP. Below are some of the changes and related details.

Scope

The second PCP provided that Bermuda entities that are members of MNE groups with limited international presence under Article 9.3.2 of the GloBE rules would be excluded from the Bermuda CIT. The third PCP specifies that this exclusion will not apply to entities that are subject to the GloBE IIR.

Observation: Including entities that are subject to the IIR is consistent with Bermuda’s stated objective of collecting taxes that otherwise would be payable to other jurisdictions. While the exclusion has been narrowed so that entities subject to the IIR are subject to the Bermuda CIT, the opposite is not true. Entities that are not subject to the IIR or the UTPR may be subject to Bermuda CIT. Bermuda MNE groups are expected to be subject to the Bermuda CIT even if they do not contain entities located in jurisdictions that have adopted GloBE rules beyond the initial five-year exclusion for in-scope groups with a limited international presence.

Calculation of taxable income

Annual adjustments to determine taxable income

A BCE’s Financial Accounting Net Income or Loss (FANIL) would be adjusted for certain items, many of which are consistent with the GloBE rules. In particular, the third PCP updates guidance on the ETA. The second PCP permitted an elective ETA upon entry into the CIT regime, with respect to a BCE’s assets and liabilities (except goodwill) held as of September 30, 2023. The third PCP changes the default position, such that the ETA applies, unless a Bermuda constituent entity elects out of its application.

Operating loss carryforward and matching adjustment do not apply to pre-ETA periods, unless the entity has elected out of the ETA

The matching adjustment allows unmatched mark-to-market movements included in FANIL, related to embedded derivatives for withheld assets under reinsurance agreements, to be excluded from taxable income as timing items. An opening tax loss carryforward allows for the carryforward of losses incurred in the five fiscal years preceding the effective date. The third PCP clarifies that the matching adjustment and the opening tax loss carryforward do not apply to periods prior to October 1, 2023, unless an election not to apply the ETA is made. Further guidance regarding the application of the matching election and opening tax loss carryforward is expected.

The draft legislation also confirms that the special 10-year spread deduction for IFRS 17 and LDTI transition losses cannot be made, unless a BCE has elected out of the ETA.  

Observation: After release of the second PCP, there was uncertainty as to how the opening tax loss carryforward and other tax adjustments would interact with the ETA. The third PCP has addressed this uncertainty by specifying that the matching adjustment and opening tax loss carryforward cannot apply to pre-ETA periods, unless the entity has elected out of the ETA. In addition, a BCE cannot claim a 10-year spread deduction for IFRS 17 and LDTI transition losses, unless it elects out of the ETA. Affected MNE groups will need to analyze and compare the different transition options, and determine which combination of elections they intend to make.

Foreign tax credits

The third PCP confirms that adjusted creditable foreign taxes generally follow the approach in the GloBE rules to calculate adjusted covered taxes for a constituent entity (including allocations from main entities in the case of permanent establishments and CFC regime taxes). It also confirms that there is no carryback or carryforward of unused credits. The third PCP also notes that the government continues to consider its rules regarding the allocation of CFC regime taxes.

Observation: MNE groups with non-Bermuda taxes (e.g., US federal income taxes or excise taxes) allocated to their Bermuda constituent entities should consider the available tax elections in terms of how they affect their ability to use foreign tax credits in a given year, and monitor developments regarding the allocation of CFC regime taxes.

See also

For prior coverage of this issue, please refer to our Tax Insight, “Proposed Bermuda corporate income tax is closely modeled after the GloBE rules, with key differences” (October 13, 2023).